Workers' Comp Tax Cut For Coal Will Hurt the Budget
A number of proposals have been made this legislative session with the perceived aim to help revitalize West Virginia's coal industry. Two such proposals have been to eliminate or scale back the additional severance tax on coal that is dedicated to paying down the state's workers' compensation system debt. But, despite assurances the tax cut wouldn't hurt the state's budget, delaying the retirement of the workers' comp debt will have an impact on future budgets.
Before 2006, West Virginia operated a state-managed workers' compensation system, and the state Workers' Compensation Commission was the sole provider of workers' compensation insurance in West Virginia. The system was privatized in 2006, but the state retained all liabilities incurred before July 1, 2005. Those liabilities were transferred into the Worker's Compensation Old Fund. At the time the Old Fund's deficit totaled $2.4 billion, with the coal industry estimated to be responsible for about half of the deficit.
A number of revenue sources are dedicated to paying down the Workers' Compensation Old Fund debt including the additional severance tax on coal, natural gas, and timber. Altogether, these revenue sources total approximately $254 million/year, with the severance tax bringing in the largest share.
With the severance tax as the largest contributor, over half of the severance tax revenue comes from the additional severance tax on coal. In FY 2014, the Workers' Compensation Debt Fund severance tax on coal brought in $63.7 million, while the tax on natural gas brought in $42.7 million. The tax on timber generated $2.9 million, while taxes on other minerals yielded about $52,000.
Severance taxes have historically been the biggest contributor to the Old Fund deficit reduction, with nearly $1 billion in severance revenue contributed since FY 2006.
Old Fund Deficit Reduction Revenue Sources (FY 2006-2015)
With the contribution from the severance tax leading the way, the state has made a great deal of progress in reducing the Old Fund's debt. The debt was reduced by nearly 85%, falling from $2.4 billion at the end of FY 2005 to $350 million at the end of FY 2014. From 2005 to 2014, the debt balance was reduced by $2.06 billion.
Old Fund Debt Balance (end of fiscal year)
While the tax break is being sold as a way to help out the coal industry, the coal industry is getting a good deal on the tax. As mentioned above, it is estimated that the coal industry was responsible for about half of the Workers' Comp Debt that the state assumed. But the severance tax on coal has accounted for less than 1/3 of the payments made to reduce that debt. Between 2006 and 2014, the workers' comp coal severance tax totaled $713 million, roughly 32% of the total payments of $2.2 billion. In fact, in no year between the start of the payments in FY 2006 and FY 2014 was coal's share of the payments higher than 42%. If the coal industry had made 50% of the payments to reflect its share of the deficit, the industry's total payments would have been $1.1 billion, more than $387 million more than it actually paid.
According to the analysis in the FY 2016 budget proposal, the workers' compensation debt is projected to be paid off by the end of calendar year 2016, or halfway through FY 2017. Once that happens, the additional severance tax on coal and gas will be removed, while $35 million of the personal income tax dedicated to the debt reduction will be dedicated to Other Post Employment Benefit programs. The other $60.4 million will be deposited into the general revenue fund, helping close projected future budget gaps.
At $254.4 million/year, the state makes an average monthly payment of $21.2 million to pay down the worker's comp debt. With an estimated payoff date of December 2016, the state will pay a total of $381.6 million to fully retire the debt, starting July 2015.
The two proposals would prolong the amount of time needed to pay off the debt by reducing the amount of severance tax tax revenue dedicated to the paying down the debt. HB 2675 reduces the tax rate on coal, natural gas, and timber. According to the fiscal note, the rate reductions will lower revenue by $10.8 million. This would reduce the total amount of annual revenue dedicated to paying down the debt to $243,6 million, and the average monthly rate to $20.3 million.
At an average monthly rate of $20.3 million, it would take an extra month to reach the $381.6 million currently projected as needed to fully retire the debt. That extra month of payments would then delay the return of the personal income tax revenue to the general revenue fund, costing the general revenue fund $5 million, and increasing FY 2017 budget gap.
HB 2394 aims to fully repeal the additional tax on coal. According to its fiscal note, it would lower revenue by $52.6 million in FY 2016 and $57.4 million in FY 2017. This would reduce the average monthly payment to $16.8 million in FY16 and $16.4 million in FY17. At those rates it would take an additional five months to reach a total of $381.6 million. Delaying the return of the personal income tax to the general revenue fund by five months would cost the fund $25.2 million, again increasing the FY 2017 budget gap. This could also significantly shift the tax responsibilities from the coal industry to state residents as the personal income tax dedication would have to stay intact longer.
There are two important factors to mention when looking at these estimates. First, neither estimate includes the additional interest that would accrue by delaying payments, which would make the costs even higher. Second, a study from WVU's BBER found these type of tax gimmicks will do little to help a coal industry that is hamstrung by low productivity, high costs, and logistical barriers. In fact, as the authors of the WVU study pointed out, dropping the severance tax altogether would likely have a limited effect on increasing in-state producers' competitiveness. But the budget pain that these cuts can create is all too real.